All issues › Volume 1, Issue 1, July – August 2026
Beyond a Single Governance Score: Rule of Law, Regulatory Quality and Foreign Direct Investment in Middle-Income Economies — A Within-Between Panel Analysis, 2006–2022
Assistant Professor (Economics), School of Law, Saveetha Institute of Medical and Technical Sciences (SIMATS), Chennai, Tamil Nadu, India
Abstract
Purpose — This paper examines whether broad institutional quality or specific legal-regulatory dimensions better explain foreign direct investment (FDI) in middle-income economies. It separates persistent between-country institutional differences from shorter-run within-country change. Design/methodology/approach — An unbalanced panel combines revised Worldwide Governance Indicators with World Development Indicators for 87 current lower- and upper-middle-income economies. The final sample contains 1,408 country-year observations from 2006 to 2022. FDI net inflows as a percentage of GDP are modeled against one-year-lagged rule of law, regulatory quality, income, growth, trade openness, inflation, natural-resource rents and population. Pooled, two-way fixed-effects and Mundlak-type within-between models use country-clustered standard errors. Findings — A principal-component institutional index is insignificant in pooled, fixed-effects and within-between models. Once rule of law and regulatory quality enter jointly, their structural coefficients diverge. A one-standard-deviation higher country-average regulatory-quality score is associated with 1.513 percentage points more FDI (SE = 0.466, p = 0.002), whereas the conditional rule-of-law coefficient is −1.037 points (SE = 0.427, p = 0.017). Their between-country difference is 2.550 points (p = 0.003). Neither dimension shows a stable positive within-country association. The regulatory-quality result survives alternative outcome treatments, exclusion of the pandemic years, long-panel and large-population restrictions, resource-rent screening and every regional jackknife. Trade openness remains positive within and between countries. Originality/value — The study shows that governance averages can conceal institution-specific relationships. It cautions against treating legal security and market-regulatory capability as interchangeable, while also rejecting a causal interpretation of the conditional negative rule-of-law coefficient.
Keywords: foreign direct investment, rule of law, regulatory quality, institutional economics, middle-income economies, panel data
How to cite
Kirubagaran, K. (2026). Beyond a Single Governance Score: Rule of Law, Regulatory Quality and Foreign Direct Investment in Middle-Income Economies — A Within-Between Panel Analysis, 2006–2022. Imaginex International Journal of Interdisciplinary Research and Reviews, 1(1), 19–29.